RWP 26-10, August 2026
Since employment dynamics are persistent, a central bank’s dual mandate to promote maximum employment and price stability naturally generates history dependence in monetary policy. This history dependence under a dual mandate flattens the reduced-form Phillips curve, reduces the volatility of inflation in response to demand shocks, and improves outcomes at the zero lower bound. Moreover, we show that a dual mandate can be observationally equivalent to average inflation targeting following a demand shock. However, this equivalence breaks down in the presence of supply shocks. We first illustrate these findings analytically and then examine their quantitative importance in a model with nominal rigidities and labor search frictions calibrated to match U.S. business-cycle moments. An employment mandate can naturally provide the stabilization benefits associated with history-dependent policy frameworks.
JEL classifications: E32, E52, J64
Article Citation
- Bundick, Brent, and Nicolas Petrosky-Nadeau. 2026. “A Dual Mandate Can Support Price Stability.” Federal Reserve Bank of Kansas City, Research Working Paper no. 26-10, August. Available at External Linkhttps://doi.org/10.18651/RWP2026-10
Related Research
- Bundick, Brent, and Nicolas Petrosky-Nadeau. 2026. “From Deviations to Shortfalls: The Effects of the FOMC’s New Employment Objective.” American Economic Journal: Macroeconomics, vol. 18, no. 1, pp. 69–101. Available at External Linkhttps://doi.org/10.1257/mac.20210381
Additional Files
The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
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